Liquidity Ratios: Liquidity ratios measure a firm’s ability to meet cash needs as they arise. That is the liquidity ratios examine the short-term solvency. Some major liquidity ratios are as follows.
- Current Ratio: the best-known liquidity measure is the current ratio, which examines the relationship between current assets and current liabilities.
- Quick Ratio: Some financial analyst believe it should not consider total current assets when gauging the ability of the firm to meet current obligations because inventories and some other assets included in current assets might not be very liquid.
- Cash Ratio: The most conservative liquidity ratio is the cash ratio, which relates the firm’s cash and short-term marketable securities to its current liabilities.
Inventory Turnover Ratio: Another current asset that should be examined in terms of its liquidity is inventory based upon the firm’s inventory turnover and the implied processing time. Inventory turnover can be calculated relative to sales or cost of goods sold.
- Activity Ratios: Activity ratios measure the liquidity of specific assets and the efficiency of managing assets.
- Total Asset Turnover: The total asset turnover ratio indicates the effectiveness of the firm’s use of its total asset base (net assets equals gross assets minus depreciation on fixed assets).
- Equity Turnover: In addition to specific asset turnover ratios, it is useful to examine the turnover for alternative capital components.
Leveraged Ratios: Leveraged ratios measure the extent of a firm’s financing structure with debt relative to equity and its ability to cover interest and other fixed charges.
- Debt-Equity Ratio: The debt figure includes all long-term fixed obligations, including lease obligations and subordinated convertible bonds.
- Long-Term Debt/Total Capital Ratio: The debt total capital ratio indicates the proportion of long-term capital derived from long-term debt capital.
- Total Debt Ratios: This ratio is especially revealing for a firm that derives substantial capital from short term borrowing.
